Are you saving up for a big purchase in the near future? If so, a jumbo CD could help you earn more interest on your balance. Jumbo CDs are similar to traditional CDs, except you'll need a big minimum deposit — anywhere from $25,000 to $100,000 or more — to open one.

Sure, you can leave all your cash in a savings account, where the average annual percentage yield (APY) is just 0.46%. But with the right jumbo CD, your deposit can earn over 5%.

How do jumbo CDs work?

Jumbo CDs, or jumbo certificates, are similar to regular CDs. The main distinction between the two is the minimum deposit, which is usually around $500 for traditional CDs and $100,000 for jumbo CDs.

In return for your large deposit, you may be able to lock in a higher rate of return, though it's not always a guarantee. If market rates are high, as they are now, jumbo CD rates might not be much higher than other CDs. If market rates are expected to drop, you may find that the highest APY is only available on short-term accounts.

One downside of using jumbo CDs is you risk losing more money than other CDs if you make a withdrawal before the maturity date. That's not because the penalties are harsher — usually, you forfeit all of the interest you've earned within a set timeframe, regardless of the CD type — but because your large deposit will yield more interest.

Another concern with jumbo CDs is deposit insurance. CD deposits at banks and credit unions are typically insured by the FDIC or NCUA for up to $250,000. If you deposit more than $250,000 or exceed that amount by accruing returns, the difference will be uninsured.

Are jumbo CDs worth it?

A jumbo CD is a great option for someone who has a large amount of cash and doesn't need to use it for the next few months to a year.

For example, if you've saved roughly $100,000 for a down payment on a home and you're planning to make your purchase in three months or so, a jumbo CD with a 3-month term is one of the best places you can deposit your money. If that jumbo CD pays 5% APY, you’d earn $1,227.22 in interest. By comparison, if you put that money in the average checking account with 0.07% APY, you'd earn just $17.50 in interest in three months.

But a jumbo CD is not worth opening in most other circumstances. In particular, it's not a great choice if any of the following applies to you:

• There's a chance you'll need the cash before the maturity date.

• You have to use your emergency savings to cover some or all of the minimum deposit.

• You can deposit or invest the cash elsewhere for a year or more and earn higher returns.

• You're carrying high-interest debt, such as credit cards, which should be paid off before opening a CD.

Alternatives to a jumbo CD

If you've saved somewhere in the neighborhood of $100,000, there might be better ways to earn interest than by placing it in a CD. For short-term deposits, consider a Treasury bill, or T-bill, instead, since these low-risk investments also earn over 5% APY with terms of six months or less. But unlike CDs, you don't pay state taxes on your T-bill earnings.

For long-term deposits, use the funds to build or add to a diverse portfolio of investments since you'll likely earn better returns that way. Yes, your portfolio can include CDs, but it should also include other asset classes, such as Treasurys, stocks, bonds, and real estate.

If you have an employer-sponsored retirement plan, like a 401(K), you might be able to easily diversify your portfolio by placing some of your contribution into a mutual fund, since these funds are often made up of several asset classes. For advice on how you can diversify your portfolio and increase your returns on a retirement account, talk to a qualified investment professional.